Singapore, July 24, 2013 — Moody’s Investors Service has today affirmed Egypt’s Caa1 government
bond rating and is maintaining the negative rating outlook.
Today’s rating affirmation is supported by the following considerations:
(1) The substantial boost in Egypt’s international liquidity provided
by the $12 billion external financial support package from the
governments of Saudi Arabia (Aa3 stable), Kuwait (Aa2 stable) and
the United Arab Emirates (Aa2 stable) ;
(2) The road map laid out by the interim, military-installed
government for a return to democracy by early 2014; and
(3) The recent containment of the government’s debt-financing
costs, below post-Revolution peaks.
The maintenance of the negative outlook on Egypt’s Caa1 rating is
driven by Moody’s view of the country’s considerable economic and
political challenges.
Egypt’s B3 foreign-currency ceiling, Caa2 foreign-currency
deposit ceiling and Ba3 local-currency bond ceiling are unaffected
by today’s rating affirmation. The short-term country
ceiling for foreign-currency bonds remains unaffected at Not-Prime
(NP).
Egypt’s Caa1 bond rating indicates a material probability of default,
although this is not necessarily imminent. At the Caa1 rating level,
the historical record shows that the average, cumulative default
rate over a one-year horizon is close to 10% and over five-years
is slightly under 40%. Other sovereigns rated in the same
Caa category include Cyprus (Caa3 negative), Ecuador (Caa1 stable),
Jamaica (Caa3 stable) and Pakistan (Caa1 negative).
RATINGS RATIONALE
RATIONALE FOR AFFIRMATION
The primary driver behind Moody’s decision to affirm Egypt’s government
bond ratings is the substantial boost in Egypt’s international liquidity
provided by the $12 billion (almost 5% of GDP) financial
support package from the governments of Saudi Arabia, the United
Arab Emirates and Kuwait to, as the Saudi government noted,
“support the challenges” the country faces. This package
will have the immediate effect of offsetting pressures on Egypt’s
balance of payments by substantially bolstering official foreign-exchange
reserves. Moody’s notes, however, that reserves
are presently more than adequate to meet short and long-term debt
payments falling due in the next 12 months.
Saudi Arabia will provide $5 billion, Kuwait $4 billion
and the UAE $3 billion. Most of the $12 billion total
package will have the effect of augmenting the Central Bank of Egypt’s
(CBE) balance sheet. Saudi Arabia and the UAE each have already
made a five-year, interest-free $2 billion
deposit, and Kuwait will also provide a $2 billion deposit.
Grants to Egypt’s Treasury will be credited to CBE dollar reserve accounts.
The package also includes $3 billion in financing for petroleum
imports. Over the next 6-12 months, this funding will
likely more than offset the drain of reserves brought on by the current
account deficit, external debt repayment and capital flight (negative
errors and omissions reported in Egypt’s balance of payments statistics).
Nonetheless, Moody’s notes that this funding will provide
only temporary relief from the political and economic challenges that
Egypt faces.
The second driver of the affirmation is the roadmap for constitutional
reform and elections laid out by the interim government. The first
step will be to amend the suspended constitution, the process for
which begins with the formation of a Constitutional Review Committee and
concludes with a constitutional referendum by late-November.
Thereafter, parliamentary elections are expected to be held between
December 2013 and February 2014. The presidential election will
follow shortly after the first parliamentary session opens. Although
the roadmap is clear and timely, the attainment of a functional
post-Revolution government is vulnerable to the deepening political
polarization in Egypt, as witnessed in the ongoing boycott of the
Islamist parties in the post-Morsi political process.
The third driver of the affirmation is the containment of the government’s
debt-financing costs in recent months. Central bank financing
through the Ministry of Finance’s use of overdrafts has also helped
support the price of government securities. Yields on 90-day
T-bill yields have edged downwards to 12.9% as of
21 July, compared with a monthly average rate of 14.1%
in May, and a post-Revolution monthly peak of 14.6%
in June 2012. Nonetheless, financing costs at these levels
are likely to be unsustainable over the longer term, given the sharp
rise in government debt since 2010 and unless yields on government securities
are brought down further to pre-Revolution levels.
RATIONALE FOR THE NEGATIVE OUTLOOK
The maintenance of the negative outlook on Egypt’s Caa1 rating is
driven by Moody’s view of the country’s considerable economic and
political challenges, particularly given the deepening in Egypt’s
political divide since the military deposed the government of President
Mohamed Morsi on 4 July.
WHAT COULD MOVE THE RATING DOWN/UP
Egypt’s rating could be downgraded further if there is: (1) an intensification
of political unrest, especially if it was to derail the interim
government’s constitutional reform and electoral road map;
(2) instability in the banking system, which may prompt the imposition
of tighter capital controls on domestic deposits or foreign-exchange
transactions; (3) a sharp rise in the government’s funding costs
above previously elevated levels to a level that significantly heightens
refinancing risks; and/or (4) a significant deterioration in the
external payments position, which could occur from a collapse of
confidence and capital flight, despite the sizable financial support
package by the three Gulf countries.
Any upward movement in the rating is unlikely over the near term as captured
by the negative outlook. The implementation of an IMF-supported
program of fiscal and economic reform would be considered as credit positive,
although Moody’s notes that the resumption of talks between the
new government and the IMF staff is unlikely at present. Moreover,
economic stabilization and a post-Revolution recovery in Egypt
would hinge on a constructive resolution of the political standoff between
the forces backing the interim government and the Islamist parties.
GDP per capita (PPP basis, US$): 6,455 (2011
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.2% (2012 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.6%
(2012 Actual)
Gen. Gov. Financial Balance/GDP: -10.7%
(2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2012 Actual)
(also known as External Balance)
External debt/GDP: 13.4% (2012 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 22 July 2013, a rating committee was called to discuss the rating
of the Egypt, Government of. The main points raised during
the discussion were: The issuer’s economic fundamentals, including
its economic strength, have not materially changed. The issuer’s
fiscal or financial strength, including its debt profile,
has not materially changed. The issuer’s susceptibility to event
risks has not materially changed. In addition the discussion focused
on external financial support from Saudi Arabia, Kuwait, and
the United Arab Emirates, as well as on the interim government’s
road map for a return to democracy.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody’s
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider’s credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody’s legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Thomas J Byrne
Senior Vice President
Sovereign Risk Group
Moody’s Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Bart Jan Sebastian Oosterveld
MD – Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody’s Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Sovereign Risk Group
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BartJan SebastianOosterveld
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Moody’s affirms Egypt’s Caa1 government bond rating and maintains negative outlook
Moody"s affirms Egypt"s Caa1 government bond rating and maintains negative ...
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